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Government has to be paid for

By W. James Antle III
web posted September 8, 2003

Milton Friedman is fond of reminding us that there's no such thing as a free lunch. One shouldn't have to have a Nobel Prize in economics to grasp this basic concept, yet unfortunately it does seem to require some common sense that is not particularly common.

Two items bring this to mind. During the most recent debate between the Democratic presidential candidates, putative front-runner Howard Dean reiterated his pledge to repeal every last bit of the Bush tax cuts offering us this grand bargain: Go back to paying Clinton-era tax rates and your health care is on Uncle Sam. This is pretty close to the opposite of the bargain Libertarian Harry Browne offered voters during his 2000 presidential bid, where voters would give up their favorite federal program in exchange for never paying income taxes again. Which deal you prefer probably says a lot about your philosophy of government.

Howard Dean
Dean

Some of Dean's opponents whacked him on the snout for proposing a tax increase on the middle class. After all, a smart Democrat like Bill Clinton would have only proposed to repeal the portion of the tax cut that went to the richest 1 percent of income earners (I thought some of these Democratic presidential contenders said that it all went to the top 1 percent at the time they were voting against the tax cuts – never mind, I guess "fuzzy math" is no longer politically expedient). Dean retorted that working families – that is, the kind of families that liberal Democrats claim to represent in election years and then promptly confiscate money from to bestow upon non-working families once in office – would be happy to give up the $100 or so they got from the Bush tax cuts if it meant that could have health insurance.

Dean is essentially saying two things here, neither of which is quite true. The first is that the tax cuts were trifling little things that for the middle class didn't add up to much more than those $100 rebate checks. Sen. Joe Lieberman (D-CT) deserves credit for pointing out that the reduction in the marriage penalty and other tax relief produced savings for many middle-class families much bigger than $100. But secondly, Dean is implying that the federal government can provide universal health care if the average family just ponies up $100. It will in fact cost a lot more than that, as a cursory glance at the tax rates paid by our Canadian friends (not to mention in several leading countries of Western Europe) would indicate.

Socialized medicine is an appealing concept to a lot of Americans, even many who realize that socialism doesn't work, for obvious reasons. Workers who don't have health insurance, especially those with families, worry about how to pay health care costs and lay awake nights wondering how they would manage in the event of a catastrophic medical emergency. Those who do have health insurance know too well that HMOs can be unpleasant to deal with. In short, everyone realizes that there are flaws in the United States' current health care system and many believe, partly because this is how it is done with varying levels of success in other industrialized countries, that the best way to rectify them is through some type of government takeover.

Leaving the arguments for and against a more government-run health system aside for the purpose of this discussion, this much should be clear: Government can't really provide free health care. The people will still need to pay for it. This payment will merely take other forms (taxes, mandated private expenditures that are little different from taxes, rationing, etc.). But the bottom line is that the provision of health care costs money and this is a reality that government can't simply legislate away.

This brings me to the second item that reminded me of Friedman's line about free lunch. I watched a brief interview with a leading conservative journalist. He was asked if he was concerned about the $480 billion deficit. This journalist said no, he was not worried, because deficits don't really matter unless the government is in a position where it is likely to default on the money it is borrowing. And he assured us that we were a long, long way away from that.

It's true that sometimes it is better to run a deficit than increase marginal tax rates, depending on the financing costs and because the former might have a less negative impact on the cost of capital and incentives to produce. It is also true that deficit spending may be appropriate in such extraordinary circumstances as wars and economic downturns, both of which we find ourselves in now. Certainly, a string of $500 billion deficits is a small price to pay to defeat the monsters responsible for the unprecedented attacks on our soil two years ago and who are willing to contemplate more atrocities on that scale.

Nevertheless, I thought that "deficits don't matter" line to be rather cavalier, especially for a conservative journalist. It was difficult to avoid the impression that if one of the Democrats now running were president rather than Republican George W. Bush, he would put a slightly different spin on the subject. Government borrowing still takes money out of the economy. Government spending financed by deficits rather than taxes still has to be paid for by someone, possibly future generations whose tax burdens will be determined in part by our profligacy today.

Indeed, to the extent that the $480 billion deficit is a misleading figure to get worried about, it is only because it masks the true extent of the fiscal problems that lie ahead. The federal government has assumed a number of entitlement obligations that it will in coming years have increasing difficulty paying for. These outstanding liabilities threaten to dwarf the annual deficit figures. Lower tax rates do have a positive incentive effect on the economy, but that doesn't mean that government programs still don't need to be paid for. With marginal tax rates further away from the Laffer Curve's prohibitive range than during the Reagan years, this suggests a conflict between low taxes and government growth that many of my conservative compatriots are unwilling to contemplate.

At the risk of sounding like Ross Perot, Americans are faced with a bipartisan refusal to deal with the fact that government programs aren't free. Too many Republicans believe it is fiscally responsible to continue growing government as long as it is financed by deficits rather than taxes. Too many Democrats define fiscal responsibility as taking as much of the people's money in taxes as politically possible and continuing to grow government as long as the budget is balanced.

Neither approach is fiscally responsible in the long term. What is needed is not higher taxes or more borrowing. It is less spending and a rethinking of the proper role of government. The U.S. government is trying to be an unlimited welfare state, a world policeman and a guarantor of the liberty and security of the American people all at the same time. Only one of these roles fits in with our federal government's constitutional purpose and only one is really a legitimate aim of government.

But all of them cost money. The American people need to decide how much they are willing to pay and what they believe is most important to pay for. The "all things to all people" approach may be politically appealing. It is just not indefinitely sustainable. After lunch is over, the bill eventually comes.

W. James Antle III is a senior editor for Enter Stage Right.

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